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LIMITED LIABILITY COMPANIES
AN OLD IDEA FOR THE WORLD, A NEW IDEA
FOR CALIFORNIA
Introduction:
Limited Liability
Companies are the newest form of limited liability entity to emerge in
California though equivalent structures have existed in other states for
decades and in Europe for over a hundred years. Put in the most simple way,
they allow limited liability while allowing taxation to passed through to
the owners much as a partnership and do not require the record keeping,
bylaws, and annual shareholder and director meetings that a traditional
California corporation requires. So long as the entity adheres to strict
Internal Revenue Code requirements passed to ensure that the ownership
interests do not become too much like stock shares (e.g. restrictions on
transfer, survivability of the company despite change in ownership, etc.)
then the tax treatment allows the owners to consider the entity
"transparent" while maintaining limited liability status for
outside creditors. This is similar to the Subchapter S election for a
corporation but with fewer limitations.
What especially appeals
to many people is the more fluid nature of the Operating Agreement, the
document signed by the owners which provides for how the company is to be
operated. Except for the restrictions imposed by the IRS, the owners are
free to create their own arrangements, much like a traditional partnership,
and this flexibility seems attractive to small businesses.
There is a prevailing
and, in this writer's opinion, unwarranted belief that Limited Liability
Company creation is somehow easier or cheaper than the creation of a
corporation or that the day to day operation of such an entity is somehow
easier. It is true that many of the corporate formalities such as annual
meetings, stock certificates, corporate seals, and the like are not
necessary for the Limited Liability Company and that one need not file the
Corporate Subchapter S election to obtain the personal taxation status that
is inherent in the Limited Liability Company structure. It is also true
that the Limited Liability Operating Agreement can be adjusted, perhaps
easier, than a corporation's bylaws, to the unique requirements of a
particular business or group of owners.
But, in reality, the
Limited Liability Entity costs about the same as a corporation to set up,
given new changes in the various filing costs, and one is required to
create an operating agreement to run the entity that is usually just as
complex as the bylaws of a corporation.
Actually, most small
businesses do not even bother to review the By laws of a corporation or the
Operating Agreement of a Limited Liability Company unless some dispute
occurs within the company and in such events it is the corporation which
usually has the clearer and more carefully honed rules for resolving
disputes. Corporations have existed in California for over one hundred and
fifty years. Limited Liability Companies have existed world wide for almost
as long but only existed in California for about ten years. This means that
the courts have had little opportunity to make the case law that allows one
to know how the courts will enforce various provisions. Additionally, the
very formalities of a corporation that require a little extra effort, the
minute books and the annual meetings, are the very things which help
protect the individual owners from individual liability if someone seeks to
pierce the corporate veil. (See Article on Piercing the Corporate Veil on
the Retainer Article Page.)
For those sophisticated
in business with clear motivations and plans as to how to structure the
entity, the LLC is a useful device. For most start up businesses, the
traditional corporation still makes the most sense. Both cost about the
same to create, both should not take more than perhaps ten hours a year to
keep up to date on formalities, and both, at least theoretically, create
the limited liability one should have in any business venture.
The key document of the
Limited Liability Company is the Operating Agreement which forms the
"ruling" document for the running of the business. California law
inserts requirements, as does the Internal Revenue Service, as to certain
provisions that must be included to avoid adverse tax consequences and
those rules are a compelling reason why the client is advised to use the form
below as informational only and to obtain competent tax and legal advice
before creating any LLC.
Warning to Clients
Regarding this Form
The attached short form
operating agreement, like any form, is illustrative only, and not intended
to govern a particular transaction. Each provision should be carefully
analyzed in light of the needs of the client and the particulars of the
transaction, and revised appropriately. This form is essentially given for
client's consideration and general knowledge and should not be utilized
until discussed in detail and probably altered by legal counsel.
Because of the brevity
of the attached form, it relies to a great extent on the
"default" provisions of the Beverly-Killea Limited Liability
Company Act to govern the rights and obligations of the members to each
other and to the limited liability company. Therefore, when using this
form, the client's tax advisor and legal counsel should carefully review
the applicable provisions of the Act to determine their application to the
rights and obligations of the members, and to determine whether the Act's
default provisions should be altered by the agreement.
Particular care should
be exercised when drafting the assignment and dissolution provisions of the
agreement (Article VI, Section 7.1, and Section 9.1 of the attached
form). The attached form follows the Act's default rules with
respect to assignment of interests and events of dissolution. The Act's
default rules were intended to satisfy the Internal Revenue Service's requirements
for avoiding the corporate characteristics of free transferability of
interests and continuity of life, to ensure that a limited liability
company formed under the Act would be taxed as a partnership.
If the client
intends to alter the provisions of Article VI, or Sections 7.1 and 9.1, he
or she should ensure that the provisions as so revised still satisfy the
IRS's requirements for avoiding free transferability of interests and
continuity of life. If, for business reasons, the client revises Article VI
so that the LLC possesses the characteristic of free transferability of
interests, then he or she must ensure that the LLC lacks both continuity of
life and centralized management. Likewise, if the client revises Sections
7.1 and 9.1 so that the LLC possesses the characteristic of continuity of
life, then he or she must ensure that the LLC lacks both free
transferability of interests and centralized management. Competent
professional advice is required.
Additional tax and
non-tax considerations include: (i) the ability of the LLC to render
certain services, (ii) the use of an LLC for estate planning purposes,
(iii) the statutory presumption that an interest in an LLC is a security,
(iv) mandatory (non-waivable) provisions under the Act, (v) the default
provisions of the Act which will apply unless the operating agreement
contains a provision to the contrary, and (vi) exceptions to the general
rule that members are not liable for the obligations of the LLC.
OPERATING
AGREEMENT
FOR
______________________________________
LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
This Operating
Agreement (this "Agreement"), is made as of ________, 20__, by
and among the parties listed on the signature pages hereof (collectively
referred to as the "Members" or individually as a
"Member"), with reference to the following facts:
A. The Members
[have/will cause to be] filed Articles of Organization (the
"Articles") for ______________ LLC (the "Company"), a
limited liability company under the laws of the State of California, with
the California Secretary of State.
B. The Members desire
to adopt and approve an operating agreement for the Company under the
Beverly-Killea Limited Liability Company Act (the "Act").
NOW, THEREFORE, the Members
by this Agreement set forth the operating agreement for the Company upon
the terms and subject to the conditions of this Agreement.
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 Name. The
name of the Company shall be "__________________________ LLC."
The Company may conduct business under that name or any other name approved
by the Members.
1.2 Term. The
term of the Company commenced as of the date of the filing of the Articles
and, unless sooner terminated under Section 9.1, shall terminate on
_______________.
1.3 Office and Agent.
The Company shall continuously maintain an office and registered agent in
the State of California as required by the Act. The principal office of the
Company shall be at ___________________________________ or such location as
the Members may determine. The registered agent shall be as stated in the
Articles or as otherwise determined by the Members.
1.4 Business of the
Company. Notwithstanding the purpose of the Company which is described
in the Articles, the Company shall not engage in any business other than
the following without the consent of all of the Members:
(a)
the business of _____________________; and
(b)
such other activities directly related to the foregoing business as may be
necessary or advisable in the reasonable opinion of the Members to further
such business.
ARTICLE II
CAPITAL CONTRIBUTIONS
2.1 Capital
Contributions. Each Member shall make a cash contribution to the
capital of the Company in the amount shown opposite the Member's name on
Exhibit A attached hereto. No Member shall be required to make any
additional contributions to the capital of the Company. Additional
contributions to the capital of the Company shall be made only with the
unanimous consent of the Members. Except as provided in this Agreement, no
Member may withdraw his or her capital contribution.
2.2 Capital Accounts.
The Company shall establish an individual capital account ("Capital
Account") for each Member. The Company shall determine and maintain
each Capital Account in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv). Upon a valid transfer of a Member's interest in the
Company ("Membership Interest") in accordance with Article VI,
such Member's Capital Account shall carry over to the new owner.
2.3 No Interest.
The Company shall not pay any interest on capital contributions.
ARTICLE III
MEMBERS
3.1 Admission of
Additional Members. Additional Members may be admitted with the
approval of all Members. Additional Members will participate in the
management, "Net Profits", "Net Losses" (as such terms
are defined in Section 5.1), and distributions of the Company on such terms
as are determined by the Members. Exhibit A shall be amended upon the
admission of an additional Member to set forth such Member's name and
capital contribution.
3.2 Withdrawals or
Resignations. Any Member who is under an obligation to render services
to the Company may withdraw or resign as a Member at any time upon 120 days
prior written notice to the Company, without prejudice to the rights, if
any, of the Company or the other Members under any contract to which the
withdrawing Member is a party. In the event of such withdrawal, such
Member's Membership Interest shall be terminated, such Member shall
thereafter only have the rights of a transferee as described in Section 6.3
and such Membership Interest shall be subject to purchase and sale as
provided in Section 7.2. No other Member may withdraw, retire or resign
from the Company.
3.3 Payments to
Members. Except as specified in this Agreement or pursuant to a
transaction permitted by Section 4.6, no Member or person or entity
controlled by, controlling or under common control with the Member (each
such person or entity is defined as an "Affiliate"), is entitled
to remuneration for services rendered or goods provided to the Company.
However, the Company shall reimburse the Members and their Affiliates for
organizational expenses (including, without limitation, legal and
accounting fees and costs) incurred to form the Company, prepare the
Articles and this Agreement and, as approved by the Members, for the actual
cost of goods and materials used by the Company.
ARTICLE IV
MANAGEMENT AND CONTROL
OF THE COMPANY
4.1 Management and
Powers. In entering into this Agreement, the intent of each Member is
to actively engage in the management of the Company. Accordingly, unless
otherwise limited by the Articles or this Agreement, each Member shall have
full, complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the Company, to make all
decisions regarding those matters and to perform any and all other acts or
activities customary or incident to the management of the Company's
business, property and affairs.
4.2 Limitations on
Power of Members. Notwithstanding any other provisions of this
Agreement, no debt or liability of more than $__________ may be contracted
on behalf of the Company without the approval of the Members and the
signature of __ Members is required to sign contracts and obligations on
behalf of the Company. Additionally, no Member shall have authority to
cause the Company to engage in the following transactions without first
obtaining the approval of Members holding a majority of the Membership
Interests:
(i)
The sale, exchange or other disposition of all, or substantially all, of
the Company's assets occurring as part of a single transaction or plan, or
in multiple transactions over a _____ month period, except in the orderly
liquidation and winding up of the business of the Company upon its duly
authorized dissolution.
(ii)
The merger of the Company with another limited liability company or corporation,
general partnership, limited partnership or other entity (except that any
act which would cause a Member to incur personal liability for the
obligations of the Company or its successor shall also require the consent
of such Member).
(iii)
An alteration of the authorized businesses of the Company as set forth in
Section 1.4.
(iv)
Any act which would make it impossible to carry on the ordinary business of
the Company.
(v)
The confession of a judgment against the Company.
(vi)
Any other transaction described in this Agreement as requiring the
approval, consent or vote of the Members.
4.3 Member Approval.
No annual or regular meetings of the Members are required to be held.
However, if such meetings are held, such meetings shall be noticed, held
and conducted pursuant to the Act. In any instance in which the approval of
the Members is required under this Agreement, such approval may be obtained
in any manner permitted by the Act. Unless otherwise provided in this
Agreement, approval of the Members shall mean the approval of Members who
hold a majority of the Membership Interests.
4.4 Devotion of Time.
Each Member shall devote whatever time or effort as he or she deems appropriate
for the furtherance of the Company's business.
4.5 Competing
Activities. The Members and their Affiliates may engage or invest in
any activity, including without limitation those that might be in direct or
indirect competition with the Company. Neither the Company nor any Member
shall have any right in or to such other activities or to the income or
proceeds derived therefrom. No Member shall be obligated to present any
investment opportunity to the Company, even if the opportunity is of the character
that, if presented to the Company, could be taken by the Company. Each
Member shall have the right to hold any investment opportunity for his or
her own account or to recommend such opportunity to persons other than the
Company. The Members acknowledge that certain Members and their Affiliates
own and/or manage other businesses, including businesses that may compete
with the Company and for the Members' time. Each Member hereby waives any
and all rights and claims which he or she may otherwise have against the
other Members and their Affiliates as a result of any of such activities.
4.6 Transactions
between the Company and the Members. Notwithstanding that it may
constitute a conflict of interest, the Members and their Affiliates may
engage in any transaction with the Company so long as such transaction is
not expressly prohibited by this Agreement and so long as the terms and
conditions of such transaction, on an overall basis, are fair and
reasonable to the Company and are at least as favorable to the Company as
those that are generally available from persons capable of similarly
performing them or if Members holding a majority of the Membership
Interests held by the Members having no interest in such transaction (other
than their interests as Members) approve the transaction in writing.
ARTICLE V
ALLOCATIONS OF NET
PROFITS AND NET LOSSES AND DISTRIBUTIONS
5.1 Definitions.
When used in this Agreement, the following terms shall have the meanings
set forth below:
"Code"
shall mean the Internal Revenue Code of 1986, as amended from time to time,
the provisions of succeeding law, and to the extent applicable, the
Treasury Regulations.
"Company
Minimum Gain" shall have the meaning ascribed to the term
"Partnership Minimum Gain" in the Treasury Regulations Section
1.704-2(d).
"Member
Nonrecourse Debt" shall have the meaning ascribed to the term
"Partner Nonrecourse Debt" in Treasury Regulations Section
1.704-2(b)(4).
"Member
Nonrecourse Deductions" shall mean items of Company loss,
deduction, or Code Section 705(a)(2)(B) expenditures which are attributable
to Member Nonrecourse Debt.
"Net
Profits" and "Net Losses" shall mean the income,
gain, loss, deductions, and credits of the Company in the aggregate or
separately stated, as appropriate, determined in accordance with the method
of accounting at the close of each fiscal year employed on the Company's
information tax return filed for federal income tax purposes.
"Nonrecourse
Liability" shall have the meaning set forth in Treasury
Regulations Section 1.752-1(a)(2).
"Treasury
Regulations" shall mean the final or temporary regulations that
have been issued by the U.S. Department of Treasury pursuant to its
authority under the Code, and any successor regulations.
5.2 Allocations of
Net Profit and Net Loss.
A.
Net Loss. Net Loss shall be allocated to the Members in proportion
to their Membership Interest. Notwithstanding the previous sentence, loss
allocations to a Member shall be made only to the extent that such loss
allocations will not create a deficit Capital Account balance for that
Member in excess of an amount, if any, equal to such Member's share of
Company Minimum Gain that would be realized on a foreclosure of the
Company's property. Any loss not allocated to a Member because of the
foregoing provision shall be allocated to the other Members (to the extent
the other Members are not limited in respect of the allocation of losses
under this Section 5.2A). Any loss reallocated under this Section 5.2A
shall be taken into account in computing subsequent allocations of income
and losses pursuant to this Article V, so that the net amount of any item
so allocated and the income and losses allocated to each Member pursuant to
this Article V, to the extent possible, shall be equal to the net amount
that would have been allocated to each such Member pursuant to this Article
V if no reallocation of losses had occurred under this Section 5.2A.
B.
Net Profit. Net Profit shall be allocated to the Members in
proportion to their Membership Interests.
5.3 Special
Allocations. Notwithstanding Section 5.2,
A.
Minimum Gain Chargeback. If there is a net decrease in Company
Minimum Gain during any fiscal year, each Member shall be specially
allocated items of Company income and gain for such fiscal year (and, if
necessary, in subsequent fiscal years) in an amount equal to the portion of
such Member's share of the net decrease in Company Minimum Gain that is
allocable to the disposition of Company property subject to a Nonrecourse
Liability, which share of such net decrease shall be determined in
accordance with Treasury Regulations Section 1.704-2(g)(2). Allocations
pursuant to this Section 5.3A shall be made in proportion to the amounts
required to be allocated to each Member under this Section 5.3A. The items
to be so allocated shall be determined in accordance with Treasury
Regulations Section 1.704-2(f). This Section 5.3A is intended to comply
with the minimum gain chargeback requirement contained in Treasury
Regulations Section 1.704-2(f) and shall be interpreted consistently
therewith.
B.
Chargeback of Minimum Gain Attributable to Member Nonrecourse Debt.
If there is a net decrease in Company Minimum Gain attributable to a Member
Nonrecourse Debt, during any fiscal year, each member who has a share of
the Company Minimum Gain attributable to such Member Nonrecourse Debt
(which share shall be determined in accordance with Treasury Regulations
Section 1.704-2(i)(5)) shall be specially allocated items of Company income
and gain for such fiscal year (and, if necessary, in subsequent fiscal
years) in an amount equal to that portion of such Member's share of the net
decrease in Company Minimum Gain attributable to such Member Nonrecourse
Debt that is allocable to the disposition of Company property subject to
such Member Nonrecourse Debt (which share of such net decrease shall be
determined in accordance with Treasury Regulations Section 1.704-2(i)(5)).
Allocations pursuant to this Section 5.3B shall be made in proportion to
the amounts required to be allocated to each Member under this Section
5.3B. The items to be so allocated shall be determined in accordance with
Treasury Regulations Section 1.704-2(i)(4). This Section 5.3B is intended
to comply with the minimum gain chargeback requirement contained in
Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted
consistently therewith.
C.
Nonrecourse Deductions. Any nonrecourse deductions (as defined in
Treasury Regulations Section 1.704-2(b)(1)) for any fiscal year or other
period shall be specially allocated to the Members in proportion to their
Membership Interests.
D.
Member Nonrecourse Deductions. Those items of Company loss,
deduction, or Code Section 705(a)(2)(B) expenditures which are attributable
to Member Nonrecourse Debt for any fiscal year or other period shall be
specially allocated to the Member who bears the economic risk of loss with
respect to the Member Nonrecourse Debt to which such items are attributable
in accordance with Treasury Regulations Section 1.704-2(i).
E.
Qualified Income Offset. If a Member unexpectedly receives any
adjustments, allocations, or distributions described in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event
creates a deficit balance in such Member's Capital Account in excess of
such Member's share of Company Minimum Gain, items of Company income and
gain shall be specially allocated to such Member in an amount and manner
sufficient to eliminate such excess deficit balance as quickly as possible.
Any special allocations of items of income and gain pursuant to this
Section 5.3E shall be taken into account in computing subsequent
allocations of income and gain pursuant to this Article V so that the net
amount of any item so allocated and the income, gain, and losses allocated
to each Member pursuant to this Section 5.3E to the extent possible, shall
be equal to the net amount that would have been allocated to each such
Member pursuant to the provisions of this Article V if such unexpected
adjustments, allocations, or distributions had not occurred.
5.4 Code Section
704(c) Allocations. Notwithstanding any other provision in this Article
V, in accordance with Code Section 704(c) and the Treasury Regulations
promulgated thereunder, income, gain, loss, and deduction with respect to
any property contributed to the capital of the Company shall, solely for
tax purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for
federal income tax purposes and its fair market value on the date of
contribution. Allocations pursuant to this Section 5.4 are solely for
purposes of federal, state and local taxes. As such, they shall not affect
or in any way be taken into account in computing a Member's Capital Account
or share of profits, losses, or other items of distributions pursuant to
any provision of this Agreement.
5.5 Distribution of
Assets by the Company. Subject to applicable law and any limitations
contained elsewhere in this Agreement, Members holding a majority of the
Membership Interests may elect from time to time to cause the Company to
make distributions. Distributions shall be first to the Members in
proportion to their unreturned capital contributions until each Member has
recovered his or her capital contributions, and then to the Members in
proportion to their Membership Interests.
ARTICLE VI
TRANSFER AND ASSIGNMENT
OF INTERESTS
6.1 Transfer and
Assignment of Interests. No Member shall be entitled to transfer,
assign, convey, sell, encumber or in any way alienate all or any part of
his or her Membership Interest (collectively, "transfer") except
with the prior approval of all Members, which approval may be given or withheld
in the sole discretion of the Members.
6.2 Substitution of
Members. A transferee of a Membership Interest shall have the right to
become a substitute Member only if (i) consent of the Members is given in
accordance with Section 6.1, (ii) such person executes an instrument
satisfactory to the Members accepting and adopting the terms and provisions
of this Agreement, and (iii) such person pays any reasonable expenses in
connection with his or her admission as a new Member. The admission of a
substitute Member shall not release the Member who assigned the Membership
Interest from any liability that such Member may have to the Company.
6.3 Transfers in
Violation of this Agreement and Transfers of Partial Membership Interests.
Upon a transfer in violation of this Article VI, the transferee shall have
no right to vote or participate in the management of the Company or to
exercise any rights of a Member. Such transferee shall only be entitled to
receive the share of the Company's Net Profits, Net Losses and
distributions of the Company's assets to which the transferor would
otherwise be entitled. Notwithstanding the immediately preceding sentences,
if, in the determination of the remaining Members, a transfer in violation
of this Article VI would cause the termination of the Company under the
Code, in the sole discretion of the remaining Members, the transfer shall
be null and void.
ARTICLE VII
CONSEQUENCES OF
DISSOLUTION EVENTS AND
TERMINATION OF
MEMBERSHIP INTEREST
7.1 Dissolution
Event. Upon the occurrence of the death, withdrawal, resignation,
retirement, insanity, bankruptcy or dissolution of any Member
("Dissolution Event"), the Company shall dissolve unless all of
the remaining Members ("Remaining Members") consent within ninety
(90) days of the Dissolution Event to the continuation of the business of
the Company. If the Remaining Members so consent, the Company and/or the
Remaining Members shall [have the right to] purchase, and [if such right is
exercised,] the Member (or his or her legal representative) whose actions
or conduct resulted in the Dissolution Event ("Former Member")
shall sell, the Former Member's Membership Interest ("Former Member's
Interest") as provided in this Article VII.
7.2 Withdrawal.
Notwithstanding Section 7.1, upon the withdrawal by a Member in accordance
with Section 3.2 such Member shall be treated as a Former Member, and,
unless the Company dissolves as a result of such withdrawal, the Company
and/or the Remaining Members shall [have the right to] purchase, and [if such
right is exercised,] the Former Member shall sell, the Former Member's
Interest as provided in this Article VII.
7.3 Purchase Price.
The purchase price for the Former Member's Interest shall be the fair
market value of the Former Member's Interest as determined by an
independent appraiser jointly selected by the Former Member and by
Remaining Members holding a majority of the remaining Membership Interests.
The Company and the Former Member shall each pay one-half of the cost of
the appraisal. Notwithstanding the foregoing, if the Dissolution Event
results from a breach of this Agreement by the Former Member, the purchase
price shall be reduced by an amount equal to the damages suffered by the
Company or the Remaining Members as a result of such breach.
7.4 Notice of Intent
to Purchase. Within thirty (30) days after the fair market value of the
Former Member's Interest has been determined in accordance with Section
7.3, each Remaining Member shall notify the Members in writing of his or
her desire to purchase a portion of the Former Member's Interest. The
failure of any Remaining Member to submit a notice within the applicable
period shall constitute an election on the part of the Member not to
purchase any of the Former Member's Interest. Each Remaining Member so
electing to purchase shall be entitled to purchase a portion of the Former
Member's Interest in the same proportion that the Membership Interest of
the Remaining Member bears to the aggregate of the Membership Interests of
all of the Remaining Members electing to purchase the Former Member's
Interest.
7.5 Election to
Purchase Less Than All of the Former Member's Interest. If any
Remaining Member elects to purchase none or less than all of his or her pro
rata share of the Former Member's Interest, then the Remaining Members can
elect to purchase more than their pro rata share. If the Remaining Members
fail to purchase the entire interest of the Former Member, the Company
[may] [shall] purchase any remaining share of the Former Member's Interest.
[Any purchase of a Former Member's Interest must be the entire interest.]
7.6 Payment of
Purchase Price. The Company or the Remaining Members, as the case may
be, shall pay at the closing one-fifth (1/5) of the purchase price and the
balance of the purchase price shall be paid in four equal annual principal
installments, plus accrued interest, and be payable each year on the
anniversary date of the closing. The unpaid principal balance shall accrue
interest at the current applicable federal rate as provided in the Code for
the month in which the initial payment is made, but the Company and the
Remaining Members shall have the right to prepay in full or in part at any
time without penalty. The obligation of each purchasing Remaining Member,
and the Company, as applicable, to pay its portion of the balance due shall
be evidenced by a separate promissory note executed by the respective
purchasing Remaining Member or the Company, as applicable. Each such
promissory note shall be in an original principal amount equal to the
portion owed by the respective purchasing Remaining Member or the Company,
as applicable. The promissory note executed by each purchasing Remaining
Member shall be secured by a pledge of that portion of the Former Member's
Interest purchased by such Remaining Member.
7.7 Closing of
Purchase of Former Member's Interest. The closing for the sale of a
Former Member's Interest pursuant to this Article VII shall be held at
10:00 a.m. at the principal office of Company no later than sixty (60) days
after the determination of the purchase price, except that if the closing
date falls on a Saturday, Sunday, or California legal holiday, then the
closing shall be held on the next succeeding business day. At the closing,
the Former Member shall deliver to the Company or the Remaining Members an
instrument of transfer (containing warranties of title and no encumbrances)
conveying the Former Member's Interest. The Former Member, the Company and
the Remaining Members shall do all things and execute and deliver all
papers as may be reasonably necessary fully to consummate such sale and
purchase in accordance with the terms and provisions of this Agreement.
ARTICLE VIII
ACCOUNTING, RECORDS,
REPORTING BY MEMBERS
8.1 Books and
Records. The books and records of the Company shall be kept in
accordance with the accounting methods followed for federal income tax
purposes. The Company shall maintain at its principal office in California
all of the following:
A.
A current list of the full name and last known business or residence
address of each Member set forth in alphabetical order, together with the
capital contributions, capital account and Membership Interest of each
Member;
B.
A copy of the Articles and any and all amendments thereto together with
executed copies of any powers of attorney pursuant to which the Articles or
any amendments thereto have been executed;
C.
Copies of the Company's federal, state, and local income tax or information
returns and reports, if any, for the six (6) most recent taxable years;
D.
A copy of this Agreement and any and all amendments thereto together with
executed copies of any powers of attorney pursuant to which this Agreement
or any amendments thereto have been executed;
E.
Copies of the financial statements of the Company, if any, for the six (6)
most recent fiscal years; and
F.
The Company's books and records as they relate to the internal affairs of
the Company for at least the current and past four (4) fiscal years.
8.2 Reports. The
Company shall cause to be filed, in accordance with the Act, all reports
and documents required to be filed with any governmental agency. The
Company shall cause to be prepared at least annually information concerning
the Company's operations necessary for the completion of the Members'
federal and state income tax returns. The Company shall send or cause to be
sent to each Member within ninety (90) days after the end of each taxable
year (i) such information as is necessary to complete the Members' federal
and state income tax or information returns and (ii) a copy of the
Company's federal, state, and local income tax or information returns for
the year.
8.3 Bank Accounts.
The Members shall maintain the funds of the Company in one or more separate
bank accounts in the name of the Company, and shall not permit the funds of
the Company to be commingled in any fashion with the funds of any other
person. Any Member, acting alone, is authorized to endorse checks, drafts,
and other evidences of indebtedness made payable to the order of the
Company, but only for the purpose of deposit into the Company's accounts.
All checks, drafts, and other instruments obligating the Company to pay
money in an amount of less than $__________ may be signed by any one
Member, acting alone. All checks, drafts, and other instruments obligating
the Company to pay money in an amount of $__________ or more must be signed
on behalf of the Company by any _____ Members acting together.
8.4 Tax Matters for
the Company. ______________ is designated as "Tax Matters
Partner" (as defined in Code Section 6231), to represent the Company
(at the Company's expense) in connection with all examination of the
Company's affairs by tax authorities and to expend Company funds for professional
services and costs associated therewith.
ARTICLE IX
DISSOLUTION AND WINDING
UP
9.1 Conditions of
Dissolution. The Company shall dissolve upon the occurrence of any of
the following events:
A.
Upon the happening of any event of dissolution specified in the Articles;
B.
Upon the entry of a decree of judicial dissolution pursuant to Section
17351 of the Corporations Code;
C.
Upon the vote of Members holding at least _______ percent (__%) of the
Membership Interests;
D.
The occurrence of a Dissolution Event and the failure of the Remaining
Members to consent in accordance with Section 7.1 to continue the business
of the Company within ninety (90) days after the occurrence of such event;
or
E.
The sale of all or substantially all of the assets of Company.
9.2 Winding Up.
Upon the dissolution of the Company, the Company's assets shall be disposed
of and its affairs wound up. The Company shall give written notice of the
commencement of the dissolution to all of its known creditors.
9.3 Order of Payment
of Liabilities Upon Dissolution. After determining that all the known
debts and liabilities of the Company have been paid or adequately provided
for, the remaining assets shall be distributed to the Members in accordance
with their positive capital account balances, after taking into account
income and loss allocations for the Company's taxable year during which
liquidation occurs.
9.4 Limitations on
Payments Made in Dissolution. Except as otherwise specifically provided
in this Agreement, each Member shall be entitled to look only to the assets
of the Company for the return of his or her positive Capital Account
balance and shall have no recourse for his or her Capital Contribution
and/or share of Net Profits against any other Member except as provided in
Article X.
9.5 Certificates.
The Company shall file with the California Secretary of State a Certificate
of Dissolution upon the dissolution of the Company and a Certificate of
Cancellation upon the completion of the winding up of the Company's
affairs.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification
of Agents. The Company shall indemnify any Member and may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of
the fact that he or she is or was a Member, officer, employee or other
agent of the Company or that, being or having been such a Member, officer,
employee or agent, he or she is or was serving at the request of the
Company as a manager, director, officer, employee or other agent of another
limited liability company, corporation, partnership, joint venture, trust
or other enterprise (all such persons being referred to hereinafter as an
"agent"), to the fullest extent permitted by applicable law in
effect on the date hereof and to such greater extent as applicable law may
hereafter from time to time permit.
ARTICLE XI
INVESTMENT
REPRESENTATIONS
Each Member hereby
represents and warrants to, and agrees with, the Members and the Company as
follows:
11.1 Preexisting
Relationship or Experience. He or she has a preexisting personal or
business relationship with the Company or one or more of its officers or
controlling persons, or by reason of his or her business or financial
experience, or by reason of the business or financial experience of his or
her financial advisor who is unaffiliated with and who is not compensated,
directly or indirectly, by the Company or any affiliate or selling agent of
the Company, he or she is capable of evaluating the risks and merits of an
investment in the Company and of protecting his or her own interests in
connection with this investment.
11.2 No Advertising.
He or she has not seen, received, been presented with, or been solicited by
any leaflet, public promotional meeting, article or any other form of
advertising or general solicitation with respect to the sale of the
Membership Interest.
11.3 Investment Intent.
He or she is acquiring the Membership Interest for investment purposes for
his or her own account only and not with a view to or for sale in
connection with any distribution of all or any part of the Membership
Interest. No other person will have any direct or indirect beneficial
interest in or right to the Membership Interest.
ARTICLE XII
MISCELLANEOUS
12.1 Counsel to the
Company. Counsel to the Company may also be counsel to any Member or
any Affiliate of a Member. The Members may execute on behalf of the Company
and the Members any consent to the representation of the Company that
counsel may request pursuant to the California Rules of Professional
Conduct or similar rules in any other jurisdiction ("Rules"). The
Company has initially selected _______________________________
("Company Counsel") as legal counsel to the Company. Each Member
acknowledges that Company Counsel does not represent any Member in the
absence of a clear and explicit agreement to such effect between the Member
and Company Counsel, and that in the absence of any such written agreement
Company Counsel shall owe no duties directly to a Member. Notwithstanding
any adversity that may develop, in the event any dispute or controversy
arises between any Members and the Company, then each Member agrees that
Company Counsel may represent either the Company or such Member in any such
dispute or controversy to the extent permitted by the Rules, and each
Member hereby consents to such representation. Each Member further
acknowledges[: (a)] that Company Counsel has represented the interests of
[_____________________] in connection with the formation of the Company and
the preparation and negotiation of this Agreement [and (b) while
communications with Company Counsel concerning the formation of the Company
and its Members may be confidential with respect to third parties, no
Member has any expectation that such communications are confidential with
respect to _____________].
12.2 Complete
Agreement. This Agreement and the Articles constitute the complete and
exclusive statement of agreement among the Members with respect to the
subject matter herein and therein and replace and supersede all prior
written and oral agreements among the Members. To the extent that any
provision of the Articles conflict with any provision of this Agreement,
the Articles shall control.
12.3 Binding Effect.
Subject to the provisions of this Agreement relating to transferability,
this Agreement will be binding upon and inure to the benefit of the
Members, and their respective successors and assigns.
12.4 Interpretation.
All pronouns shall be deemed to refer to the masculine, feminine, or
neuter, singular or plural, as the context in which they are used may
require. All headings herein are inserted only for convenience and ease of
reference and are not to be considered in the interpretation of any
provision of this Agreement. Numbered or lettered articles, sections and
subsections herein contained refer to articles, sections and subsections of
this Agreement unless otherwise expressly stated. In the event any claim is
made by any Member relating to any conflict, omission or ambiguity in this
Agreement, no presumption or burden of proof or persuasion shall be implied
by virtue of the fact that this Agreement was prepared by or at the request
of a particular Member or his or her counsel.
12.5 Jurisdiction.
Each Member hereby consents to the exclusive jurisdiction of the state and
federal courts sitting in California in any action on a claim arising out
of, under or in connection with this Agreement or the transactions
contemplated by this Agreement. Each Member further agrees that personal
jurisdiction over him or her may be effected by service of process by
registered or certified mail addressed as provided in Section 12.8 of this
Agreement, and that when so made shall be as if served upon him or her
personally within the State of California.
12.6 Arbitration.
Except as otherwise provided in this Agreement, any controversy between the
parties arising out of this Agreement shall be submitted to the American
Arbitration Association for arbitration in ____________, California. The
costs of the arbitration, including any American Arbitration Association
administration fee, the arbitrator's fee, and costs for the use of
facilities during the hearings, shall be borne equally by the parties to
the arbitration. Attorneys' fees may be awarded to the prevailing or most
prevailing party at the discretion of the arbitrator. The provisions of
Sections 1282.6, 1283, and 1283.05 of the California Code of Civil
Procedure apply to the arbitration. The arbitrator shall not have any power
to alter, amend, modify or change any of the terms of this Agreement nor to
grant any remedy which is either prohibited by the terms of this Agreement,
or not available in a court of law. [In addition, the arbitrator shall have
no power or authority to __________________.]
12.7 Severability.
If any provision of this Agreement or the application of such provision to
any person or circumstance shall be held invalid, the remainder of this
Agreement or the application of such provision to persons or circumstances
other than those to which it is held invalid shall not be affected thereby.
12.8 Notices.
Any notice to be given or to be served upon the Company or any party hereto
in connection with this Agreement must be in writing (which may include
facsimile) and will be deemed to have been given and received when
delivered to the address specified by the party to receive the notice. Such
notices will be given to a Member at the address specified in Exhibit A
hereto. Any party may, at any time by giving five (5) days' prior written
notice to the other Members, designate any other address in substitution of
the foregoing address to which such notice will be given.
12.9 Amendments.
All amendments to this Agreement will be in writing and signed by all of
the Members.
12.10 Multiple
Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
12.11 Attorney Fees.
In the event that any dispute between the Company and the Members or among
the Members should result in litigation or arbitration, the prevailing party
in such dispute shall be entitled to recover from the other party all
reasonable fees, costs and expenses of enforcing any right of the
prevailing party, including without limitation, reasonable attorneys' fees
and expenses, all of which shall be deemed to have accrued upon the
commencement of such action and shall be paid whether or not such action is
prosecuted to judgment. Any judgment or order entered in such action shall
contain a specific provision providing for the recovery of attorney fees and
costs incurred in enforcing such judgment and an award of prejudgment
interest from the date of the breach at the maximum rate allowed by law.
For the purposes of this Section: (a) attorney fees shall include, without
limitation, fees incurred in the following: (1) post judgment motions; (2)
contempt proceedings; (3) garnishment, levy, and debtor and third party
examinations; (4) discovery; and (5) bankruptcy litigation and (b)
prevailing party shall mean the party who is determined in the proceeding
to have prevailed or who prevails by dismissal, default or otherwise.
12.12 Remedies
Cumulative. The remedies under this Agreement are cumulative and shall
not exclude any other remedies to which any person may be lawfully
entitled.
12.13 Consent of
Spouse. Within ten (10) days after any individual becomes a Member or a
Member marries, such Member shall have his or her spouse execute a consent
substantially in the form attached to this Agreement.
IN WITNESS WHEREOF, all
of the Members of ____________________________ LLC, A California Limited
Liability Company, have executed this Agreement, effective as of the date
written above.
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MEMBER:
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__________________________________________
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MEMBER:
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__________________________________________
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MEMBER:
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__________________________________________
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CONSENT OF SPOUSE
The undersigned
spouse(s) of the party (Members) to the foregoing Agreement acknowledge(s)
on his or her own behalf that: I have read the foregoing Agreement and I
know its contents. I am aware that by its provision my spouse grants the
Company and/or the other Members an option to purchase all of his or her
Membership Interest, including my community interest (if any) in it. I
hereby consent to the sale, approve of the provisions of the Agreement, and
agree that such Membership Interest and my interest in it are subject to
the provisions of the Agreement and that I will take no action at any time
to hinder operation of the Agreement on such Membership Interest or my
interest in it.
____________________________________
____________________________________
____________________________________
EXHIBIT A
CAPITAL CONTRIBUTION AND ADDRESSES OF MEMBERS
AS OF
________________________
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Member's
Name
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Member's Address
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Member's Capital
Contribution
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Member's
Membership Interest
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$__________
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_____%
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These Articles are
to give the reader a general description of certain areas of the law. Legal
advice is necessary to apply these legal concepts to your particular
situation. The Reader should obtain competent legal advice before
relying on the Articles.
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Area Articles Index Page
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